On Technological Progress: Analysing Ricardo’s Theory on Unemployment (original) (raw)

Comparative Advantage Theory of David Ricardo  Introduction

David Ricardo (1772-1823) was a classical British economist. He is best known for his theory on wages and profit, labor theory of value, theory of comparative advantage, and theory of rents. He born in England in 1772 and is one of 17 children. David Ricardo begins working with his father as a stockbroker at the age of 14. He retired at the age of 41 form dealt government securities after earning at estimated £1 million speculating on the outcome of the Battle of Waterloo. After retiring at age 42, Ricardo purchased a seat in Parliament for £4,000, and he served as a member of Parliament. Influenced by Adam Smith, Ricardo held company with other leading thinkers such as James Mill, Jeremy Bentham and Thomas Malthus. In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815) Ricardo conceptualized the law of diminishing returns with respect to labor and capital. Ricardo wrote his first article on economics, published in "The Morning Chronicle," at the age of 37. The article advocated for the Bank of England to reduce its note-issuing activity. Like Smith, Ricardo saw the economic world tending to expand, with capitalists accumulating capital that earlier would have been used for profits, building factories, and employing more workers while increasing wages. From the French economist Jean-Baptiste Say (1767-1832) Ricardo derived the idea that "supply creates its own demand" as producers employed and paid workers who, by spending, generated consumption and formed demand. However, Ricardo added a critical dimension to the theory of economic growth. With an expanding population and an increased demand for food, the margins of agricultural production would expand, bringing into cultivation land of lesser fertility, increasing the cost of grain (wheat, the food staple in Britain), yet increasing returns to landlords owning the better lands, earning them differential rents (above the minimum earned on the marginal lands). In turn, the capitalist would be faced with the higher wage costs necessary for buying more expensive grain to sustain workers. While the landlords got more revenues even though, Ricardo concluded, they themselves contributed little to the wealth-creating process (because they owned land and yet did not work it themselves).

Ricardo's and Malthus's common error in their conflicting theories of the value oif labour

The controversies between Ricardo and Malthus reached a new peak when Malthus published his pamphlet The Measure of Value Stated and Illustrated and Ricardo responded by his critical Notes on Malthus’s ‘Measure of Value’ (1823 [1992]) and by a further round of correspondence with Malthus (Works, IX). The new (and final) stage of these controversies was concerned with the two authors’ conflicting theories of value and, within these theories, with the excruciating issue of the invariable measure of value. Starting from some insights provided by Malthus and Ricardo in their major or final contributions, this paper deals with a rather neglected component of their controversies, i.e. with the theory of the value of labour as distinct from the value of its products. This will be done by highlighting two sets of ambiguities which affect both Ricardo’s and Malthus’s arguments. One of these hinges on the ambiguity conveyed by the word labour in so far as this reflects the three different con...

ADAM SMITH ON THE ACCUMULATION OF CAPITAL AND THE FUTURE OF WAGES1 by

ADAM SMITH ON THE ACCUMULATION OF CAPITAL AND THE FUTURE OF WAGES* by FERDINANDO MEACCI University of Padova, Italy Department of Economics and Management E-mail: ferdinando.meacci@unipd.it Fax: 39 049 8274221 ABSTRACT The system of thought of the Wealth of Nations may be said to be mostly based on two theories and two principles. The two theories are the theory of value and the theory of capital while the two principles are the principle of self-interest and the principle of competition. The aim of this paper is to highlight the hidden links between these theories and principles, on the one hand, and Smith’s views of the labor market and of the future of wages, on the other. These views descend from Smith’s implicit adoption of the principle of demand and supply (as it was later called by Malthus) in determining not only the (short-run) market price of labor (as it was later admitted by Ricardo himself) but also its (long-run) natural price. The potential increase of this price (or natural wages) is admitted in Smith’s system of thought (though not in Ricardo’s and even more so in Marx’s) as the result of a continuous process of capital accumulation intended as an increasing demand for (productive) labor. This result is based on Smith’s principle of value as labor commanded by which the self-interest of “masters and manufacturers” is overturned, through their competition in the labor market, in an increasing demand for (command of) labor and, therefore, in the payment of increasing wages. Since this final effect is possible only if the aggregate supply of labor (population) turns out to increase by less than the aggregate demand for it, an adequate theory of population is needed for Smith’s system of thought to be closed. After examining Smith’s fragmentary introduction to such a theory and his related view of the liberal reward of labor as the “cause of increasing population” as much as the “effect of increasing wealth” (Book I, Chapter VIII), the paper moves beyond the limits of this equivalence by turning to Smith’s more advanced arguments on the “uniform, constant, and uninterrupted effort of every man to better his condition” (Book II, Chapter III). It is this effort that, whatever the form of birth control implied by it, will keep the rate of growth of the supply of labor below the rate of growth of the demand for it when a continuous process of capital accumulation (and of related technical progress) is under way. Hence one of the “many other cases” of Smith’s invisible hand (Book IV, Chapter II), i.e. the recurrent (long-run) increase of real wages in spite of the counter-interest of those who are to pay them. *Paper to be presented at the Annual Meeting of the International Adam Smith Society, Viña del Mar, Chile, January 12-13, 2018. Comments are welcome.

Ricardo's and Malthus's common error in their conflicting theories of the value of labour

A particular aspect of the labor theory of value, whether put forward by the classics or further developed by the moderns, is that this theory is usually focused on the cause, measure and variations of value without distinguishing the value of commodities, as "products of labor", and the value of "labor as labor". This trend originated with Adam Smith himself in those ambiguous parts of his work where he seems, first, to confuse these concepts as if there were no difference between the point of view of an individual and the point of view of the whole society (Wealth of Nations, I.v.3); and where he seems, secondly, to contradict himself when introducing the important

An Evaluation of David Ricardo's Theory of Comparative Costs: Direct and Indirect Critiques

SSRN Electronic Journal, 2000

Following Smith's advocacy of free trade and competition, David Ricardo attempts to strengthen his theory of absolute advantage, which excludes from international trade countries which have no advantages over others, by eliminating this weakness. To do so, Ricardo introduces to the economics literature a theory of comparative cost advantage which includes countries that do not have absolute advantages in international trade. In Ricardo's framework, these countries can still gain from free trade. We present direct and indirect critiques which reveal that their advocacy of free trade is questionable. In our direct critiques we find that Ricardo's attempt is questionable for the following reasons. First, the scale of production of cloth in Portugal and that of wine in England equal 1 even though there is no reason to believe that two countries have the same scale of production for two different commodities. Second, it is argued that his theory is incomplete because it is based on particular numbers, does not determine the terms of trade, and does not take into account the unintended curtailment of demand in both countries, which in turn can make trade non-beneficial for both countries. In our indirect critiques, first we argue that Ricardo assumes the equality between the relative price and relative labor cost of two commodities even though they are different. Second, it is shown that the outcome of complete specialization in his theory prevents a country from specializing in the production of a commodity that could generate for it a substantial profit in the long run, locking the country out of industrialization. We then point out that Samuelson who supports Ricardo's theory to some extent does not consider in his proof the possible destruction of the domestic industry in the case of free trade, even though this might make domestic consumers worse off and also lock a country out of industrialization. . The author is grateful to an anonymous referee for very helpful comments and suggestions.